A struggling retail business has become the centre of a Wall Street storm. Photo / Getty Images.
Billions of dollars were this week wiped off of the ledgers of the sophisticated fund managers who have long pulled the strings on Wall Street.
In the process, a struggling retail firm became a US$10 billion (NZ$14b) company and a band of retail investors became millionaires.
So who's to blame for the meteoric rise of GameStop from less than US$20 a share at the beginning of the year to $347 a share this week?
Was it the growing power of retail trading platforms? Was it the sway of a meme-heavy Reddit discussion board? Was it the wolves of Wall Street who brought this on themselves?
Or was it perhaps a complicated combination of all those factors melded together into a viral moment that sent a warning shot to Wall Street bankers that rules of the game aren't as clear as they once were.
Kirsten Lunman, the general manager of local retail investment platform Hatch, says about 2 per cent of Hatch's community of 70,000 investors have taken a position on GameStop but warns that the crazy speculation on Wall Street this week shouldn't be confused with a stock like Tesla, which has grown on the back of enthusiasm for some time.
The GameStop moment differs in that it was motivated by a group of activists, who purposely bet against hedge funds that had taken a short position on the stock on the basis that its value would eventually fall.
In short selling, an investor borrows shares from a lender and then immediately sells them (at their $100-per-share market value, for example). The idea is then to wait for the value of the stock to drop, then buy the stock at that lower price (say $5). These stocks can then be returned to the lender, giving the short seller a decent profit ($95 per share in this case).
Put bluntly, shorting a stock could be seen as betting on, and hoping for, the demise of a business so you can make a profit.
At the best of times it's a risky strategy that requires in-depth analysis of the financials of the company involved and forecasting which way it might go.
It's not unusual for investors to take opposing positions on the same stock. One of the best examples of this was the epic battle between billionaire foes Carl Icahn and Bill Ackman, who grappled over which way controversial business Herbalife would go. Ackman backed his short position with a media blitz, pushing his view that the company was essentially a pyramid scheme. The feud eventually became the subject of the feature-length documentary Betting on Zero, and Ackman would end up losing close to US$1b on his bet.
Analysts are used to calculating the risks of other Wall Street investors taking opposing positions to them, but the teams looking at GameStop wouldn't have factored in the impact of the two-million strong subreddit called Wall Street Bets playing a game usually reserved for high-rollers.
A subreddit is an online forum that is devoted to a particular topic, on the website Reddit.
As the movement created on Wall Street Bets started to gather momentum, more and more retail investors started to bet on GameStop - quickly creating hype and inflating the price of a stock that looked doomed. Suffice to say that the hedge funds started to sweat.
"What we're seeing is a democratisation of investing," says Hatch's Lunman.
"The power used to be held in the hands of the few but now it's shifting to the many."
Lunman doesn't condone this activity and admits that these moves are not positive or healthy in the longer term, but says it's a small minority taking a stand against Wall Street behaviour that's long left Ma and Pa investors holding their hats in their hands.
Lunman says a number of factors coalesced to push the GameStop saga into such wild territory.
"It's not just access to the market. It's also these communities that you have online of people getting together. It's the availability of information that shows what institutional investors are doing," she says.
"In this one case, in particular, they recognised there were these billions of dollars of shorts on these stocks. And so, they're effectively standing up in a revolution and saying we're going to squeeze these people's stocks."
While there's no guarantee of any stock going quite as crazy or viral as this in future, Lunman says that hedge funds will likely be keeping a closer eye on the activities of retail investors in the future.
It could also leave more controversial hedge fund managers sweating over the possibility that a faceless group of online activists might take a stand against them. We've already seen the impact of this in the advertising space with online communities like Sleeping Giants working together to defund online creators and channels dedicated to promoting hateful messages. It will be interesting to see whether a similar movement now takes aim at the so-called wolves of Wall Street.
"I think hedge funds are having conversations now about future behaviours because if something like this went viral again, we could see a repeat," says Lunman.
"I also think the [US Securities and Exchange Commission] is going to have a hard time pinning fraudulent behaviour on this. So, as a result, it could happen again."
“Sorry, only the Wall Street elite can manipulate the stock market. Not the filthy masses.” pic.twitter.com/TWIBxrtc4X
— Brianna Wu (@BriannaWu) January 27, 2021
In a delicious twist of irony, there have already been calls from the free-market capitalists on Wall Street to introduce controls to ensure this can't happen again.
But US Senator Elizabeth Warren was quick to snap back at Wall Street brokers crying foul about the game they had long played.
"For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price," Warren said in a statement.
The democratising effect of technology has a good side, but it also comes with risks. The last decade of social media has, for instance, illustrated how powerful platforms can be used for nefarious activities when placed in the wrong hands. The same can also be said to apply to retail investment platforms.
Locally, the FMA has told the Herald it is keeping an eye on social media chat rooms over growing concerns that investors could be pushed into decisions by false, ill-informed or unscrupulous speculation online.
Lunman admits there are risks of the platforms being used in the wrong way, but says that those with dubious intentions are in the minority.
"Around 95 per cent of those using the platforms aren't the ones being talked about in the news," she says.
"We're talking about this 5 per cent that are potentially manipulating, potentially investing on sentiment and taking on big risks."
This might be true. But we just don't yet know how dangerous that 5 per cent is and what else they're capable of doing.
ANALYSIS: Is the economy getting better or worse? It should be a simple question.